Tokio Marine Holdings, Inc. (8766) Earnings Call Transcript & Summary

Hello, everyone. My name is Komiya, CEO of Tokio Marine Holdings. I thank you for your participation today and for your extended support towards Tokio Marine. First of all, I will be explaining about the overview of second quarter earnings and key messages from the management. Please turn to Page 3. There are 3 key messages I would like to convey to you today. The first is about the underlying performance of our business. Regarding the first half earnings, leading aside the FX factor which worked in favor of us, the underlying performance of underwriting business continues to be strong, mainly in international business, such as North America and Brazil. . Regarding sales of business-related equities. It is being done swiftly as we have divested JPY 606 billion in the first half of the year, exceeding the original projection. Second point is revision of full year projection. As I have explained, underwriting performance continues to be strong. However, situation surrounding CRE loans is tough based on the trend of work from home and interest rates as well as inflation staying high. We will be increasing CECL provisions in the second half of the year in a conservative manner. As a result, excluding sales of business-related equities, actual basis profit projection for fiscal '24 will be reduced by JPY 82 billion to JPY 528 billion. At the same time, profit projection, including sales of business-related equity, which serves as the source of dividend payment will be JPY 1,040 trillion, up by JPY 40 billion from the original projection due to accelerated sales of business-related equities. Excluding such capital gains and losses, where one-off impacts such as CRE loan related matters and acceleration, deceleration of legacy sales, normalized basis profit projection will be the same as the original projection. Third point is regarding shareholder return. We will have the same policy that shareholder return expansion should be consistent with profit growth. With such policy in mind, regarding dividend payments, which is the basis of shareholder return, because the actual basis adjusted net income projection was revised upward, we are also revising the DPS upward from JPY 159 by JPY 3 to be JPY 162 over DPS. We will continue to be disciplined with capital adjustment. That means incremental capital created will be put to M&A to further enhance ROE and/or to risk-taking. If we cannot find such good opportunities, then we will use the capital for share buyback. Our most recently calculated ESR was 147%, which is a fulfilling level. Today, we are announcing TOB on ID&E Holdings, which is a domestic top class engineering consultancy firm by JPY 97.8 billion. Other than this, we have multiple potential M&A opportunities in the pipeline, mainly bolt-on acquisitions. We also need to be thinking about the impact on EPS growth. Considering the situation comprehensively, we have decided to increase budget for share buyback from the original JPY 200 billion to be JPY 220 billion. This will be explained in more detail from our CFO, Mr. Okada later on. So first, let me explain about the first message underlying profit trend in more details. Please turn to Page 4. This page is regarding top line. My comments will be excluding FX factor. For the first half of the year, net press written increased year-on-year by 5.7%, driven by rate increases in Japan and international businesses. On the right-hand side, life insurance premiums decreased by 32.9% due to block reinsurance ceded by Tokio Marine & Nichido Life Insurance Co. in April this year. In both P&C and Life businesses, the top line result is in line with the original projections. Based on the actual performance of the first half of the year, we have updated annual projections. So net premiums written on the left will be up 5.3% year-on-year and life insurance premiums will be minus 15.9% year-on-year. Next, I will explain about adjusted net income. Please turn to Page 5. Group overall adjusted net income as of Q2 as you can see on the right-hand side, it was JPY 771.2 billion. And excluding sales of equities, it is the number in the parenthesis, which is JPY 359 billion, measuring this are the progress rate against the original projections for the fiscal year. They are as high at 77% and 59%, respectively. Such high rate of progress is due to brisk underwriting business in North America and Brazil, as we have mentioned, as well as FX effect, which was in favor to our business. I will be explaining the details more specifically, business by business on this page. In the blue box, I will explain about the Japan P&C. So number one, excluding the April Hyogo hail damage, which was added on to this year's projection at the beginning of the year, we have had a benign nat cat for the first half of the year. And number 2, provision of yen appreciation at the end of September made us reverse foreign currency-denominated claim results. These 2 factors made progress rates look rather high. However, even by excluding these one-off factors, we are still in line with the original projections. We are seeing some increase in the loss ratio of auto but we already have a plan to respond to this with the rate increase expected in January of next year. Next is the international business. The international business reporting is based on FX as of end of June and yen depreciation had amplified their profits in yen basis. But looking at it in local currency terms, excluding FX factor, progress rate for the first half of the year is 52%, also in line with the original projections. Insurance underwriting business in major markets such as North America and Brazil is strong, and investment income in North America is also solid. On the other hand, [indiscernible] capital loss on CRE loans was also done in the first half of the year. And including that, we are still in line with the plan. Next, I will explain about the full year projection based on the current situation. Please turn to Page 6. Revised adjusted net income projection for the full year 2024 on an actual basis is, as you see on the right-hand side bar graph, is JPY 1.040 billion, up JPY 40 billion versus original projections. Excluding gains from business-related equities, adjusted income will be revised down by JPY 82 billion to JPY 528 billion. Positive factors include: strong underwriting in the international business in North America and Brazil; benign nat cat for Japan P&C; and accelerated sales of business-related equities. Negative factors include conservative CECL provisions related to CRE loans, among others. Details of management view of CRE loans are shown on Page 40 and beyond for the -- in the slide deck. Since CECL provisions are based on highly conservative assumptions on a single year basis in FY 2024, a large part of the income related to CRE loans will be used up yet. From an accumulated return perspective as well as some the conservative reserve ratio, adding impairment and CECL, we believe to have an advantage over other players. Needless to say, this does not change our view of the overall credit investment of the whole Group. We will continue to leverage the long-term and predictable capital to enjoy investment return while controlling risk appropriately. Please turn to Page 7. This page shows the full year projections of adjusted income on a normalized basis, taking out one-offs such as gains and losses on sales, be it nat cat, capital gains and losses, such as CRE loans and sales of business-related equities. In a sense, this shows our current underlying capabilities, a launch pad, if you will, for fiscal year 2025 profits. We expect flat growth versus original projections. Management will continue to pursue globally diversified, bottom focused, strong underwriting and leverage robust capital gains as a driver to achieve top-tier EPS growth with profits. With EPS growth and well-disciplined capital policy, we strive to further enhance ROE. That will be all for me. Thank you very much for that. Capital policy will be covered by Mr. Okada.

This is Okada, CFO. Please turn to Page 8 for shareholder return. As I have explained in the past, our shareholder return policy is dividend payment, increase EPS sustainably in line with profit growth. This is our policy. Adjusted net income on an actual basis for FY '24, including gains in sales from business-related equities was, as explained by Mr. Komiya, revised up JPY 40 billion. Our profit growth remains quite strong. Therefore, DPS for fiscal year 2024, in line with profit growth will be up JPY 3 from original plan to JPY 162. DPS growth will be up JPY 32 year-over-year. Please turn to Page 9 of the slide deck. Regarding capital level adjustment and share buyback as a means to adjust, our stance remains unchanged. In other words, as always, we -- if we have the opportunity to increase corporate value through M&A or risk taking, such transactions will be executed. While in case there is a lack thereof, the share buyback will be executed. Regarding M&A, we announced the TOB of a leading Japanese company in the engineering consulting industry, ID&E holdings for a total of JPY 97.8 billion, as was explained by Mr. Komiya. This TOB will enable us to make end-to-end value offerings in the area of disaster prevention and mitigation. Such a business model is globally one of a kind. ID&E is focused on capital-light consulting business, and therefore, this is transaction that contributes to enhancing our corporate value. As for international business, valuation of large M&A remains high and therefore, require patience, but there are a number of small- and medium-sized bolt-ons in the pipeline. While we are working on our growth strategy in Japan and abroad, our ESR is 147% at a solid level. Regarding impact to EPS growth, increase in market cap will also need to be taken into account. We took these factors into account comprehensively and decided to increase share buybacks for fiscal year 2024 to JPY 220 billion from our original plan of JPY 200 billion. More specifically, since JPY 100 billion is already approved and executed, the Board approved the execution of JPY 120 billion today. We will continue to steadily execute our business strategy to increase both EPS and ROE and live up to the expectations of the capital market. That is all for me.